Interview with Alexander Osterwalder- Business Model Canvas

The Business Modell Canvas is, simply said, a way of visually depicting business models. It is a broad tool that can also be used for already existing business models. What is interesting about this tool in particular is that it can be used both by startups and major enterprises like GE, Gazprom or P&G, offering a broad range of possibilities. Actually emerging from drawing new business ideas, it is mainly being used today by corporations to evaluate already existing business models. It is very important to understand the difference between a framework (concept) and a tool. We see the Business Model Canvas as a tool, because it can be directly implemented in a meeting or a working session. The „Tool-Aspect“ here is extremely important, because it directly increases the efficiency of a meeting, conference or conversation.

What triggered the development of the Business Model Canvas and the Business Model Innovation?

The journey started with my doctoral thesis, which I wrote together with Yves Pigneur, my thesis supervisor at that time and Co-Author of “Business Model Generation“. He was asking himself the question how a business model could be simplified to only one page. The goal however wasn’t to come up with a business plan. The actual question was rather how to model a business model. And if I can model it, can I even make it a computer-aided design? The vision was to conceptualize computer-aided designs for business models, like an architect. After my thesis was finished and published in 2004, a book was made out of it. Our vision came true: today we use our company “Strategyzer” to develop those computer-aided designs.

What is the BMC’s main value? Do you see any threats that it might over simplify and suggest too much linearity?

We did some research and asked us: „Why was the Business Model Canvas so successful?“. We weren’t the first that wrote about this topic and developed such a model, since there are countless models and people that dedicate themselves to business models. However, no single model has had the same reach as the Business Model Canvas. Over 1 Million books have been sold in over 30 different languages. We were asking ourselves: „Why is that?“ and therefore did a survey with over 3000 participants and conducted interviews with businesses and managers. What was surprising is that the answers were quite simple and straightforward. The difference to other models was, that you do not only talk about a topic but concretely draw it on paper.

The Business Model Canvas allows us to quickly communicate the idea behind a business model. If that only happens in words, it is rather difficult to understand the different links and correlations. One will most likely talk about the product, notify it and think about how to get money out of it. But the fundamentals of business models are much broader than that, which the BMC tries to explain with its nine building boxes. The Business Model Canvas helps people to better lead strategic conversations about existing business models and to implement new ones. People also mentioned that ideas could be implemented better via the BMC because they become more tangible.

What also needs to be added is that one works a lot more efficient when using a tool. I always do the analogy: If I give you a nail and tell you to hammer it into the wall with your bare hand, you will realize right away that this doesn’t make any sense. In business it is the same thing. We don’t use tools, but rather try again and again to hammer this nail into the wall with our bare hands. The BMC is a tool which is supposed to help in situations like that. In general however, when tools are needed, one most likely won’t cut it. Many people like to say “the BMC doesn’t do this and that“. But the BMC only has one goal: Sketching business models. If you want to do other things such as formulating a Value Proposition, another tool has to be used. This is one reason why we also invented the “Value Proposition Canvas” (VPC).

In the future we will have lots of tools, as well as a tool for corporate culture. Today, there is no tool to approach corporate culture in the way we approach business models. Sooner or later there will be a tool that enables us to work on corporate culture, to draw an outline for it and to change it. Considering the question whether it is too simple: I don’t think so! If it were too complicated, people would not use it any more. We have tried to make the notion of the business model as simple as possible, but not too simple. A well-known adage by Albert Einstein says: “Make it as simple as possible but not simpler.” That’s what we tried and I think we succeeded, taking the amount of people using this tool into account. At the moment it seems linear only creating a picture; but that’s as linear as a business plan. It always depends upon how tools are being used. For instance, launching a new idea or a startup like Strategyzer, I start with a model. I test different aspects of this model in order to see what works and what doesn’t work. Then I adapt my model. That means that I have a series of different BMCs and continue testing. Especially at university students are still being taught that there are different models. But only all methods and processes together have the potential to develop better business models. An example: when giving a workshop people often ask me “Where is the competition?” But this is not the goal of the model. The goal is to depict the business model. The competition is part of the business model environments (BME). Therefore I need another tool to model. The BME and the VPC, as a second tool. That allows us to zoom into blocks and define more precisely how to create customer value. For different processes different tools are needed.

With what other business models can the BMC be combined comprehensively? Do you have favorites among the other models?

There is no best possible business model. There is only a good business model for a certain situation with certain variables. The business model that works in one situation may not work in another. The business model that has worked in the industrial sector, probably fails in another. No existent abstract business model works per se. The only judges of your business model are your customers. Eventually, I can think of a business model for a month, a year or a decade; but since there is no best business model this aspect does not make sense. I can develop a smart business model, or a not so smart one. The costumer remains the judge. There are two things an entrepreneur has to do. On one hand he has to concept and design a good business model – Business Model Design – and on the other hand he has to test it. These two basic skills are the skills entrepreneurs and managers must have and must strengthen – designing and testing. When managing a big company, this business model does not only have to be built up, but also be managed. It’s a different pair of shoes to manage something existing, and to build up something new. Not many people have both skills at the same time.

How can findings of the BMC be implemented afterwards?

There are different opportunities. In the past you had to write a business plan. Today there are existing teams that think about business models, integrate and immediately check them on the market. This is one way to apply the BMC. The other opportunity is, e.g. seen at Mastercard, to use the BMC for a coherent language in development teams for new products. This means you don’t draft new business models, but at the launch of a new product you outline how the adding value appears within the business model. It needs a coherent language to approach the topic. There are companies that draft every single “business unit” in order to have a clear visual prospect about different types of business models. At a workshop which I was guiding, people needed a model for M&A. Reasonable as well as the BMCs’ target is to make a business model clear. If I pursue M&A I have to evaluate whether those two models fit together to an extent which would justify a dea. In return, the BMC creates clarity. So there are many different possibilities how the BMC can be implemented. SAP, for example, needs the BMC to draft the business model of their clients. Why? To later understand how the business model of their clients work so they can explain to them how SAPs products can help them with their business model. It was an interesting assignment because the BMC wasn’t used to picture their own business model, but rather to reproduce the business model of their own B2B customer.

Speaking of M&A: For years the internet has taken the center stage when it comes to new business ideas and startups. Do you see a danger of engorgement or a second dot com bubble?

The internet has given us countless opportunities to create value and the market is far from being satisfied. Quite to the contrary, I think we are only at the beginning. Yet, acquisitions of a number of companies have been rather highly valuated. Just think of Facebook’s acquisition of WhatsApp for 19 Billion $ – that’s a staggering price. It is interesting to think about alternatives: How much would it have cost Facebook if a competitor had undermined its business model? It’s always difficult to measure the exact value, which is why many investors get a nasty surprise nowadays. Take Zynga as an example. Very few people actually thought through their business model which had only very few entry barriers leaving them vulnerable to competitors. Apple’s business model also has only very few entry barriers, yet it is robust: Even if they didn’t innovate their products over the next few years they’d still be rather successful. That being said, I expect Apple to surprise us with a new business model: their project “Carplay” for example sounds interesting and visionary.

Do the rules of Business Model Innovation also apply for online companies as they do for corporations in established industries?

There are profound differences, although I wouldn’t differentiate between Online- and Non-Online companies, but between companies with new ideas and more established ones. Imagine a company with a successful business model. It will try to realize profitability by further improving efficiency. These companies grew considerably and introduced some new products that had been compatible with their existing business models. These companies have become averse to bearing the risk of revolutionary ideas. In other words, it is much more difficult to launch new ideas in a corporate environment than in a startup. The latter is easier to handle as it suffers less constraints than established corporations. Big companies will have to adapt to this way of thinking, as the life cycle of a business model today is shorter. Kodak is virtually non-existent at this point, Alcatel-Lucent is barely surviving and Nokia has also seen better days. They are all examples of established companies who failed to proactively innovate themselves while being successful. Right now, the whole pharmaceutical industry is experiencing what I described. The life cycle of their business model already ended some years ago: Many important patents are about to expire and the industry is struggling to find potent replacements. This will cut heavily into their revenues and threaten the existence of some.

Which industry do you think needs a basic innovation at most?

Basically all industries are desperately trying to innovate themselves at the moment. Almost all major companies increase their R&D budget. What many of them still have to realize is that nowadays R&D in terms of new products will not be enough, but the best business model will win. They are struggling to successfully combine both – a new business model and existing products, which I partially account to the structure of these companies. In this context, some industries, the telecom industry for example, are further than others, but still not quick enough. Just think about how WhatsApp and Skype have damaged their previous business model. This has taught them to handle innovation better than the banking industry for instance. Banks have not been able to introduce effective processes to build new business models and value propositions as they are lacking a tradition of innovation.

You gained experiences with startups in Europe and the U.S.A. What distinguishes these enterprises and the people standing behind them?

It is always very dangerous to generalize such questions. I recognized that a global culture of startups seems to be evolving. I met a lot of different people that want to execute new tools to be able to develop new ideas. A ‘global movement’ exists. However, we have to draw a general difference between the Silicon Valley and the rest of the world. The Silicon Valley is interesting to look at because you find many young people who act naive and think they can change the world with really fatuous ideas. If hundreds of people pursue this behavior and only one of them succeeds, it always seems like everyone were to succeed. Those people exist and they don’t have any qualm to continue their dream. The fear of standing there with egg on one’s face isn’t around. I partly like the European approach because people act less greenly. It is important to find the correct mixture between those two cultures. Fascinating to see – whether it is the US, especially Silicon Valley, Europa or Asia – is that there is always a small group of people who perform better in certain things than others. Today you are most likely to find such people in the US though, because there are more people who try very hard. In Europe you sense and recognize a wave of companies with new startup ideas. The benefit for these corporations clearly is that new ideas are less naively proceeded which therefore decreases the risk.

Which advise would you give students interested in founding to take along?

Last year I was in the jury of the “International Business Model Competition”. In this competition the students don’t develop a business plan and present it. No, they show how they started with their business model and how they have strengthened it. It was impressive for the jury to see how the students went through their business models in a process after BMC, Business Model Design and Customer Development, since they have started without any experience from a very naive point. That was eye-opening for the students. They are quickly content and think they know how the world works. The winners of the competition, “Owlet”, showed us how rigorously they tested their ideas and how often they have failed by doing that. Since they have tested it in a process they haven’t lost money, but time. So my advice is quite simple: we should use the tools and processes we need in entrepreneurship. Writing business plans is non-sense, that is no entrepreneurship. If an investor asks you for your business plan and decides to invest in you based upon that business plan, I would not choose him as an investor. This investor is investing in a fantasy you can’t prove. An investor believing in you as a team and your capabilities to spread ideas is likely to be more successful than an investor blindly investing in absurd numbers. There are still investors that want business plans. Nevertheless, this process slowly ceases. We all know these business plans are made up. The real thing is to try out things. My advice to students is: try it out! And then test it, test it, test it! Important in this case is to slightly fall flat on one’s face. To fall heavily on one’s flat face is easy. Taking small steps in this case is much more exhausting, but it leads to success. Many young entrepreneurs think they have succeeded as soon as they have acquired funding. But success determines itself upon how many customers want to pay me in the long run.

Alexander Osterwalder is an entrepreneur, speaker and business model innovator. Together with Professor Yves Pigneur he co-authored Busi- ness Model Generation, a global bestseller on the topic of business model innovation. His Business Model Canvas is used by leading organizations around the world, like GE, P&G and Ericsson. Alexander is a frequent keynote speaker and has held guest lectures in top universities around the world, including Stanford, Berkeley, MIT, IESE and IMD. Alexander holds a PhD from HEC Lausanne, Switzerland. He is recipient of the Innovation Luminary Award 2013. He is also a founding member of The Constellation, a global not-for-profit organization aiming to make HIV/ AIDS and Malaria history.